Stamping out practices precipitating forex crunch!
Ethiopia’s economy is facing some of the strongest headwinds for decades. Despite growing for over a decade at a rate that has not been matched even by oil producing nations for year, it has been buffeted by a raft of problems for the past three years. Chief among the factors to blame for the slowdown in the economy is the persistent foreign exchange shortage. Ethiopia’s foreign exchange receipt is paltry in comparison to its ballooning import bills leading to a chronic balance of payment crisis that seems to have no end in sight. The situation is exacerbated by the inexplicably poor management and usage of a resource that is increasingly difficult to generate. The unavailability of precise information on the country’s foreign currency reserve is indicative of the gravity of the problem. Unless things change drastically the future does not bode well at all.
Prime Minister Abiy Ahmed (Dr.) said in a speech he gave to various sections of the public over the weekend that his administration is committed to working hard to revitalize the stalled economy and that steps would be taken to arrest the egregious mismanagement of foreign exchange by government agencies implementing mega projects. Similarly, in talks he held with members of the business community he announced that aside from introducing reforms aimed at putting an end to the profligate use of hard currency robust measures aimed at those involved in illicit transfer of foreign currency were in the works. He urged businesspersons who had salted away money overseas to repatriate it immediately. Ethiopia is a victim of illicit financial flows of staggering proportions. According to some reports on average it loses around USD 3.4 billion annually to illegal money by way of, among others, the parallel market. The destruction of foreign-owned factories and farms during the political crisis that has been plaguing the country since 2015 has also engendered a drop in investor confidence and thereby the significant outflow of foreign exchange. If the government drags its feet in restoring the private sector’s confidence the foreign exchange dearth is set to continue.
If a rapid structural change in export composition is not brought about whereby Ethiopia’s main exporter earners switch from a few primary agricultural products to industrial outputs, the foreign exchange drought is unlikely to abate. The government must first and foremost review policies that have been in place for the past 26 years through the lens of contemporary needs and challenges. Ascribing failures to poor performance no longer works. Undertaking huge public sector investment that is starving the private sector of the foreign currency it needs goes against the free market economic policy espoused by the government. That is why it is vitally important that the private sector, which is the engine of growth, join the manufacturing sector in large numbers and engage in both import substitution and export activities so that it contributes its share to alleviating the foreign exchange crunch. This calls for on the government to implement enabling policies and strategies, level the playing field, streamline its bureaucracy and provide guarantees that build investor confidence. Presently Ethiopia’s annual expenditure to cover import bills reportedly has gone up to USD 15 billion. How can it make ends meet when it generates only USD 6.4 billion in a year without having to go to donors cap in hand to make up the shortfall? Such glaring imbalance points to the seriousness of the foreign exchange scarcity confronting Ethiopia.
Ethiopians are perplexed and frankly ashamed by Ethiopia’s spending of hard currency to import certain commodities like wheat, edible oil and sugar. Given it has vast arable land, water resources and above all a large workforce, doesn’t its inability to produce such products in quantities that exceed local demand and can be exported necessitate a critical rethinking of its agricultural and industrial policies? The wastage of time and resources on building ten sugar factories, most of which have not become operational to date, constitutes a manifest failure and mismanagement in the sector. The government would do well to realize that this state of affairs is principally attributable not to poor performance but rather policy deficiencies and as such demands a holistic solution anchored in the imperative to attach greater importance to import substitution as well as to incentivizing entrepreneurship and innovation in this regard. Condemning a nation which can be the bread basket of Africa to perpetual dependence on foreign aid is a height dereliction of duty history will never forgive.
The unfairness characterizing the utilization of foreign exchange should be another area of focus. Life-saving drugs are getting scarce and in some cases entirely unavailable on account of the foreign exchange shortage forcing importers of medicine and medical instruments to close up shop. Other essential goods are in short supply as well. A number of directives pertaining to the use and management of foreign exchange have been issued by the regulatory National Bank of Ethiopia (NBE) over the years. Though the directives give priority to essential items in the allocation of foreign exchange, the fact that government projects enjoy a special privilege has exacerbated the problem and given rise to the inequities. While manufacturers endure months of wait months to obtain the hard currency needed to import raw materials, “privileged users” are instantaneously availed with the amount they ask to import even non-essential things. Such patently evident unjustness is leading to circumstances where private sector companies operate at a loss and eventually lay off workers. This is liable to have unpleasant social and political ramifications that Ethiopia can ill afford.
Manufactures imperiled by the dearth of foreign exchange should be offered succor in the form of soft financing and other incentives in conjunction with an immediate stop to the inequitable allotment of foreign exchange. It is also incumbent on the pertinent government agencies to address, inter alia, the proliferation of shady practices in the import and export trade sector resulting in the squandering of foreign currency, the large volume of foreign exchange circulating outside banks, the alarming rate of illicit capital flow, the considerable amount of remittances to the country through informal channels, the puny export performance, the low level of foreign currency reserve as well as the lack of transparency and accountability in foreign exchange us and management. This needs to be complimented with measures aimed at restoring the confidence of investors and the community that was battered by the three-year long political unrest gripping Ethiopia and the spotty record in paying compensation to victims of the ensuing violence so as to encourage them to repatriate the foreign currency they sent overseas. Ethiopia can never sustainably grow on the back of the service sector or donors’ assistance alone. It must undertake a host of reforms enhancing its manufacturing and export capacity to boost foreign exchange earnings and stamp out practices precipitating the chronic crunch in same.